Britain will be only nation still in recession next year

IMF says every other major economy will be growing again by 201

The British economy is heading for its worst year since the Great Depression, according to the latest predictions from the International Monetary Fund (IMF).

The fund shocked analysts during a briefing in which it was revealed that the UK will see its economy shrink by 3.8 per cent in 2009, and a further 0.2 per cent in 2010 – the only large economy predicted to still be in decline next year as well as this.

Some believe that the scale of the downturn signals the UK moving from recession to depression.

The IMF expects the global economy to contract by 0.6 per cent this year, with the most frightening situation developing in Japan, with a 5 per cent slump predicted there. The IMF had previously thought the world economy would fall by 0.5 per cent.

Behind the raw statistics are some grim economic realities. A downgrade of growth of these proportions means that the UK is set for a much sharper decline in its fortunes than in any of the previous recessions since the Second World War.

It will mean an even worse rise in unemployment, widely expected to breach the two million barrier today before hitting more than 3 million this time next year. Property values, consumer spending and the public finances will all be badly affected.

The revelations will prove acutely embarrassing to the Prime Minister as he prepares to host the G20 summit of the world's largest and fastest-growing economies in London on 2 April. Gordon Brown's ambitions to lead the world response to the economic crisis will be undermined if his own economy is demonstrating such feebleness in response to policy measures he and the Bank of England announced in recent months, in an effort to fix the banking system. The Prime Minister, say critics, will have presided over a "boom and bust" economy.

George Osborne, the shadow Chancellor, said: "These IMF forecasts show that Britain is set to have the longest recession of all the major economies. It is further evidence that Gordon Brown's economic model is fundamentally broken and his policies on the recession aren't working. Thanks to Labour the recession in Britain will be longer and deeper."

Government sources accused the IMF of "moving the goalposts" and dramatically revising the forecasts it made in January. They said that what mattered at such a volatile time was the data on Britain's actual performance, and so far it had been affected less badly than the US, Germany, Japan and Italy. Officials said the IMF had made much larger reductions for 2009 for other countries, with Japan moving from minus 2 per cent to minus 5 per cent since January. For 2010, the downward revision for the UK since January was 0.4 per cent and for the US 1.4 per cent. For 2009 and 2010, the UK's growth has been downgraded from minus 2.8 per cent and 0.2 per cent to minus 3.8 per cent and minus 0.2 per cent respectively.

The UK seems to be suffering from a peculiarly nasty cocktail of factors. First is the size and weakness of the UK's banking system and a previous reliance on financial services. The credit crunch has thus restricted lending and seen more bank failures here than in some other nations.

Second, and partially as a result of that, the UK's property boom has turned to bust more dramatically than in many other places, as the supply of home loan finance has evaporated. Third, the UK depends for about 17 per cent of its income on exports, which are being battered by the global collapse in demand.

All this has meant that Britain's manufacturing, construction and finance sectors have haemorrhaged jobs. Only the public sector is showing any signs of resilience.

The numbers will prove a problem to the Treasury as it prepares for the Budget next month. The public finances are already severely squeezed under the existing Treasury assumption of a contraction of about 1 per cent in the economy this year. Borrowing – forecast to peak at £118bn next year – will soar even higher.

The IMF says the US economy will shrink by 2.6 per cent this year, compared with a January forecast of a 1.6 per cent contraction. The eurozone economy, dominated by Germany, is expected to contract by 3.2 per cent, down from January's forecast of a 2 per cent decline. In recent weeks the director general of the IMF, Dominique Strauss-Kahn, has called the slowdown the "Great Recession".

3.8%

The amount the British economy is predicted to shrink by this year, according to figures from the IMF.